- The DXY index fell to 102.10 and is now rising at 102.50.
- Markets turned risk-averse on Tuesday, seeking refuge in the US dollar.
- CPI inflation from December will be the highlight of the week on Thursday.
The United States Dollar (USD) index on Tuesday reached the 102.50 mark on an upward trajectory, mainly supported by the general negative market sentiment that is boosting demand for the dollar. Additionally, investors are keeping an eye on Thursday's Consumer Price Index (CPI) results as a factor that could determine the movement of the currency pair in the next session.
For now, the market is betting on five rate cuts in 2024, largely rejecting the Federal Reserve's prediction of just 75 basis points of easing. December's CPI reading will play a major role in shaping expectations for the central bank's easing calendar, as solid labor market data for the US economy was largely offset by weakness in the US ISM PMI.
Daily digest of market trends: USD gains on negative market sentiment, focus on CPI
- Negative market mood is fueling an increase in demand for the dollar as investors become cautious ahead of CPI data.
- The consumer price index in December is expected to be 3.2% year-on-year, higher than the previous year's 3.1%. However, his core annual reading is expected to be 3.8%, down from his 4% in November.
- U.S. Treasury yields have been mixed, with the two-year yield hovering at 4.38%, the five-year yield near 4% and the 10-year yield hovering just above 4%.
- The CME Fedwatch tool suggests that a rate cut is unlikely at the January meeting and is expected to remain low. Markets are currently pricing in an increased likelihood of rate cuts in March and May 2024.
Technical Analysis: DXY Index bulls move further forward and remain solid above 20-day SMA
The relative strength index (RSI) of the dollar index is currently rising in positive territory, suggesting that buying momentum is gaining momentum. This is further confirmed by the Moving Average Convergence Divergence (MACD) displaying a rising green bar, reinforcing the bullish momentum of the building. The daily chart shows that the bulls are gradually regaining territory.
However, if we look at the simple moving average (SMA) more broadly, we get a somewhat contradictory picture. The pair remains solid above its 20-day SMA, supporting our short-term bullish view, but below its 100-day and 200-day SMA. This placement reveals that despite the short-term bullishness, the bears are still leading the overall trend.
Support levels: 102.30, 102.00 (20-day SMA), 101.80.
Resistance levels: 102.70, 102.90, 103.00.
Central Bank Frequently Asked Questions
Central banks have the important mission of ensuring price stability in a country or region. Whenever the prices of certain goods and services change, an economy faces inflation or deflation. A continuous increase in the price of the same product indicates inflation, and a continuous decrease in the price of the same product indicates deflation. The central bank's job is to keep demand constant by adjusting policy interest rates. The mandate for the largest central banks, such as the US Federal Reserve (Fed), European Central Bank (ECB), and Bank of England (BOE), is to keep inflation close to 2%.
Central banks have one important tool at their disposal to raise or lower inflation. It is to adjust the base policy rate, commonly known as the interest rate. Upon prior communication, the central bank will issue a statement regarding the policy rate and provide additional reasons as to why it may maintain or change (lower or increase) the policy rate. Local banks will adjust their savings and lending rates accordingly, making it harder or easier for people to earn money on their savings and for businesses to take out loans and invest in their businesses. I will do it. Monetary tightening is when a central bank significantly raises interest rates. Lowering the base interest rate is called monetary easing.
Central banks are often politically independent. Members of the central bank policy committee go through a series of panels and hearings before being appointed to the policy committee seat. Each member of the board often has certain beliefs about how the central bank should control inflation and subsequent monetary policy. Doves are members who are happy with inflation slightly above 2% but want a very accommodative monetary policy with low interest rates and low lending to significantly boost the economy. Members who would rather raise interest rates to reward savings and keep a constant eye on inflation are called “hawks'' and will not rest until inflation is at or slightly below 2%.
There is usually a chairperson or president who leads each meeting, and consensus must be built between hawks and doves, with votes split to avoid a 50-50 tie on the pros and cons of the current topic. have the final say in the matter. Policies need to be adjusted. The chair often gives a speech that can be viewed live, conveying the current financial stance and outlook. Central banks seek to promote monetary policy without causing wild fluctuations in interest rates, stocks, and currencies. All members of the central bank are expected to signal their stance on markets ahead of the policy meeting event. Starting several days before the policy meeting, members are prohibited from speaking publicly until new policies are communicated. This is called the blackout period.
